Earlier this week, Cisco dropped a bombshell when it vowed to spend $1 billion to build a brand new cloud service that competes with similar services from Amazon, Google, Microsoft, HP, IBM, VMware, and others.

Cisco is calling it the Intercloud.

With the Intercloud, Cisco is joining all the other enterprise tech companies who are chasing the cloud market.

That's because companies today are using the cloud instead of buying new computers and software for new IT projects. They spent $131 billion in 2013 on the cloud, Gartner says. They will $174.2 billion in 2014 and $235 billion by 2017, predicts market research firm IHS.

But in Cisco's case, the Intercloud meant abandoning a promise of sorts it made three years ago not to build a cloud. Many of its biggest customers are service providers who sell cloud services themselves and Cisco didn't want to compete with them.

But that promise put it between a rock and a hard place.

That's because the cloud market is increasingly dominated by companies that are not Cisco customers. Cloud providers like Amazon and Microsoft don't buy much Cisco equipment. They buy cheaper alternatives that can cost up to 60 percent less, sources say. Google even builds its own network hardware.

Cisco was watching an increasing amount of enterprise technology being moved to clouds where it didn't have much of a stake, market researcher Bern Elliot, a vice president for Gartner, told Business Insider.

So Cisco will not only build a cloud, it will build an interconnected network of clouds for its customers, who are Internet and telecom service providers.

This will not only get it into the cloud market, it will help its customers compete and of being undercut by Amazon, Google, Microsoft and others. And that's a fairly genius move.

But it's also treacherous territory for Cisco, says Elliot, who was briefed with extra details about Cisco's plans.

He told us:

Cisco will sell the cloud to its biggest customers directly, competing in a way it wanted to avoid.
Cisco will ask its service provider customers and resellers to sell its cloud.

But he also had some critiques to the plan, telling us:

Cisco is late to the game. Amazon, for instance, already offers a mind-boggling number of options for its cloud with more coming out all the time.
Cisco doesn't have a lot of experience operating a cloud like this, where lots of companies share the hardware, on a global scale. (In geek speak: a multi-tenant, infrastructure as a service cloud).
Cisco's culture doesn't yet move at cloud speeds. It still tends to release new products about every 12-18 months with new features every six months. "Amazon rolls out new features every day," Elliot describes.

The toughest part, Elliot says, is that Cisco will have to adjust to razor thin margins.

"Cisco is used to a 60% gross margin business," Elliot says. In contrast, cloud providers work with less profit margin and they cut prices all the time.

That said, Cisco could do well with this project over time. It has some of the best hardware engineers on the plane and a lot of loyal customers who trust it.

"As anyone who knows the company will tell you: never underestimate Cisco," Elliot concludes.

Cisco, naturally has come-backs to all of Elliot's critiques.

When it comes to its experience with clouds, a Cisco spokesperson points out that it sells a lot of cloud equipment, particularly to enterprises that are updating their own data centers with cloud technology. It directed us to market researcher Synergy Group's report that says Cisco sells more of this cloud-friendly hardware than HP or IBM.

Cisco also uses its own cloud equipment internally, it says, in a project known as Cisco IT Elastic Infrastructure Services cloud.

The spokesperson notes that Cisco already runs some big cloud services, namely web conferencing service WebEx and a security service known as Scansafe. However, these are not the same as a "multi-tenant" cloud that will compete with Amazon. And that's what Cisco is building with the new Intercloud.

All told, Cisco says it made $4 billion in sales of equipment and services related to the cloud in FY13.

Finally, the spokesperson says there's plenty of time for Cisco to catch up and become a leader in this market: "We’re not late to the game – this is a very nascent market."

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